Ratings On Taiwan Affirmed At #AA-/A-1+# And #cnAAA/cnA-1+#; Outlook Stable

On April 21, 2017, S&P Global Ratings affirmed its 'AA-' long-term and 'A-1+'
short-term unsolicited issuer credit ratings on Taiwan. The outlook is stable. At the same time, we affirmed the 'cnAAA/cnA-1+' Greater China regional scale ratings on Taiwan.

RATIONALE

Taiwan's exceptional external position, sound monetary management, and dynamic information technology companies in the private sector support the ratings. A moderate level of government debt and a small, open economy that is vulnerable to global economic volatility are credit constraints that temper these strengths.

We expect the Taiwan economy to continue its gradual recovery from the slowdown in 2015. Although cross-strait relations have cooled since the current government took office, the negative impact on economic activities has been modest. We expect real GDP growth in the next four years to range 2.0%-2.5% annually, partly on account of growing exports by Taiwan's dynamic and highly competitive information technology firms.

Taiwan's strong external metrics are a key credit support for the government. This is the result of large and consistent current account surpluses that we project at above 15% of current account receipts (CAR) in 2017-2020. We forecast Taiwan's narrow net asset position to be maintained at above 115% of CAR in 2017-2020. Over this period, we project average annual gross external financing needs at just below 60% of CAR plus usable reserves. Taiwan's external balance sheet, as measured by the broader net external asset position, is also very strong, amounting to more than 220% of CAR.

S&P Global Ratings views Taiwan as having strong monetary flexibility. The central bank has demonstrated sound monetary management, which has kept inflation low and stable, despite the ample liquidity in the system. The

relatively flexible exchange rate for the New Taiwan dollar also helps to cushion economic and financial shocks. Taiwan's inflation has been among the lowest in Asia, and we expect its consumer price index growth to remain modest

in the medium term.

Taiwan has exhibited generally effective policymaking in recent years to promote sustainable public finances and balanced economic growth. However, the government faces potentially destabilizing differences in opinion among its people regarding cross-strait relations. Taiwan also has one of the fastest-aging populations in Asia. The current government has made amendments to the labor law that could raise costs to businesses. On the other hand, the government is also looking to reform the pension system in a way that could reduce its burden on public finances. Taiwan enjoys free information flows; its economic and fiscal data are generally viewed as reliable and published in a timely manner.

Taiwan's main credit constraints are its modest prosperity and a moderate level of government debt burden. In 2017, we estimate Taiwanese per capita GDP at US$23,600. We project net general government debt at a little below 40% of GDP by the end of 2017 although we assess contingent liabilities to be limited. This debt burden is more than 2.5x general government revenue in the year, largely reflecting Taiwan's relatively low tax revenue base.

We expect the net debt ratio to moderate in the next few years, reflecting modest budget deficits in the period. Despite the government's fiscal stimulus plans announced recently, we forecast the average general government deficit to amount to a little below 1% of GDP in 2017-2020. General government debt is likely to increase annually at close to the amount of the budget deficits during this period.

OUTLOOK

The stable outlook reflects our expectations that cross-strait relations will remain conducive for a continued recovery in Taiwan's economic performance. In this scenario, we expect modest general government fiscal deficits over the following three to four years. This expected fiscal performance should keep the level of net general government debt well below 60% of GDP.

We may raise the ratings if structural reforms lead to greater economic diversification and significantly raise average income growth. We may also raise the ratings if fiscal reforms lower Taiwan's budgetary shortfalls in a sustainable way to significantly reduce government debt. This scenario is predicated on reforms lifting economic growth sufficiently for the government to reduce spending and raise revenues materially.

We may lower the ratings if the fiscal deficits structurally widen due to a failure to adjust to unfavorable demographics or external shocks, ultimately resulting in materially higher public-sector liabilities. We may also lower the ratings if cross-strait relations deteriorate sharply, resulting in heightened geopolitical risks.